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What is Value?

What is Value?. “In general, the value of a parcel of real estate is the present value of the expected future benefits associated with ownership of the property right.”. Market Value vs. Investment Value. Market Value – Investment Value –. Basic Valuation Concepts.

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What is Value?

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  1. What is Value? “In general, the value of a parcel of real estate is the present value of the expected future benefits associated with ownership of the property right.”

  2. Market Value vs. Investment Value • Market Value – • Investment Value –

  3. Basic Valuation Concepts • Sources of Return from RE Investing • Valuation Concerns

  4. Time-Value of Money Operations • Future Value • Future Value of an Annuity • Sinking Fund Factor • Present Value • Present Value of an Annuity • Mortgage Constant

  5. Future Value (FV) • Definition - FVn = PV(1 + i)n 1 2 0 N FV = ? PV=x

  6. Future Value • Ex. Suppose you buy a tract of undeveloped land in rural Texas for $200,000. If the parcel appreciates at an annual rate of 4%, how much will you be able to sell the land for in twelve years?

  7. Future Value of an Annuity (FVA) • Definition - 0 1 2 N A A A FVA = ?

  8. Future Value of an Annuity • Ex. If you received $25,000 per year from operating an income producing property, how much would you have after 10 years assuming the opportunity cost of capital (i.e., discount rate) is 9%?

  9. Ordinary Annuity vs. Annuity Due Ordinary Annuity 0 1 2 N i% A A A Annuity Due 0 1 2 N i% A A A

  10. Future Value of an Annuity Due • Ex. If you received $25,000 per year, in advance, from operating an income producing property, how much would you have after 10 years assuming the opportunity cost of capital (i.e., discount rate) is 9%?

  11. Sinking Fund Payment • Definition: • Ex. Suppose you plan on buying a house in 5 years at an expected purchase price of $250,000. You plan on financing the house via a mortgage which requires a 20% ($50,000) down payment. If you currently have no savings, and the discount rate is 7%, how much should you set aside each year in equal installments to satisfy your down payment requirement?

  12. Present Value (PV) • Definition - PV = P0 = FV / (1 + i)n 1 2 0 N FV = x PV= ?

  13. Present Value • Ex. How much would you be willing to pay for a tract of land that you expect to be able to sell in five years, for $50,000, if the discount rate is 8%?

  14. Present Value of an Annuity (PVA) • Definition - 0 1 2 N A A A PVA = ?

  15. Present Value of an Annuity • Example: How much should you be willing to pay for an income producing (rental) property that provides expected after-tax cashflows of $10,000 per year for the next 10 years, if the discount rate is 8.5%?

  16. Present Value of an Annuity Due • Example: How much should you be willing to pay for an income producing (rental) property that provides expected after-tax cashflows of $10,000 per year for the next 10 years, with payments made at the beginning of the year, if the discount rate is 8.5%?

  17. TVM Properties • Future Values • An increase in the discount rate • An increase in the length of time until the CF is received, given a set interest rate, • Present Values • An increase in the discount rate • An increase in the length of time until the CF is received, given a set interest rate, • Note: For this class, assume nominal interest rates can’t be negative!

  18. Mortgage Constant • Definition: • Ex. Suppose you borrow $200,000 to purchase a home. The 15-year loan requires monthly payments, and has a stated nominal interest rate (APR) of 6%. What is the mortgage constant (Rm) on this loan, and what is the required monthly payment?

  19. Amortization • Loan Amortization Schedules • Ex. Consider a $200,000, 15-year, fixed-rate monthly payment mortgage with a contract interest rate of 6%. • What is required monthly payment of this loan? • After 5 years, what is the remaining mortgage balance? • During the first year, what is the fraction of the total payments that go toward satisfying accrued interest obligations? • What is the total amount of interest paid over the life of this loan?

  20. Alternative Investment Projects

  21. Net Present Value (NPV) • Definition – • NPV for Turtle Beach Townhouses • NPV for Vermont Vacation Villas • Decision Rules: • Independent Projects – • Mutually Exclusive Projects –

  22. Internal Rate of Return (IRR) • Definition – • IRR for Turtle Beach Townhouses • IRR for Vermont Vacation Villas • Decision Rules: • Independent Projects – • Mutually Exclusive Projects –

  23. Capitalization Rate (R) • Definition – • Capitalization Rate (R) for Turtle Beach Townhouses • Capitalization Rate (R) for Vermont Vacation Villas • Problems: • Independent Projects – • Mutually Exclusive Projects – • Conclusion:

  24. Point of Indifference? • Cross-over Rate

  25. Pricing Floating-Rate Securities • Floaters – • Pricing Determinants: • Implications of Pricing Determinants:

  26. Pricing Inverse-Floating Rate Securities • Inverse Floaters – • Pricing Determinants: • Example:

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